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    Break-Even Point & Contribution Margin

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    Regional Airways, Inc., a small two-plane passenger airline, has asked for your assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Regional's base airport to the major city in the state, Metropolis. Each month 40 round-trip flights are made. Shown on page 219 is a recent month's activity in the form of a cost-volume-profit income statement.

    Fare revenues (300 fares) $45,000
    Variable costs
    Fuel $14,000
    Snacks and drinks 800
    Landing fees 2,000
    Supplies and forms 1,200 18,000

    Contribution margin 27,000
    Fixed costs
    Depreciation 3,000
    Salaries 15,000
    Advertising 500
    Airport hanger fees 1,750 20,250

    Net income $ 6,750

    Instructions
    (a) Calculate the break-even point in (1) dollars and (2) number of fares.

    Per Fare
    $45,000/ 300 fares = $150 a fare
    Fuel = 46.67
    Snacks = 2.67
    Landing Fees = 6.67
    Supplies = 4
    Total Var. Costs $60.01

    1.

    Contribution margin per unit = Unit selling price- Unit variable costs
    89.99 = $150 - 60.01

    Contribution margin ratio= Contribution margin per unit / Unit selling price
    60% =89.99 / 150

    Break-even point in dollars= Fixed cost / Contribution margin ratio
    33,750=20,250 / .60

    2.

    Sales-Variable costs+Fixed costs+Net income

    150Q - 60.01Q + 20,250 + 0
    89.99Q - 20,250
    Q = 225.03 units

    (b) Without calculations, determine the contribution margin at the break-even point.

    (c) If fares were decreased by 10%, an additional 100 fares could be generated. However,
    variable costs would increase by 35%. Should the fare decrease be adopted?

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    Solution Summary

    Solution shows calculations of the break-even point in dollars, number of fares and the contribution margin in an attached Excel document.

    $2.19

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